Strategic uses of family investment companies in Europe and the Middle East


Family investment companies are increasingly being used by nuclear and extended family groups to facilitate succession planning and co-alignment of investment objectives between relatives. Drivers for this typically include tax mitigation and estate planning but also a harmonisation of income objectives and diversification away from core family business income with the protection of limited liability and an independent platform. This article examines the typical origins of entrepreneurial family wealth, considers and defines the differences between family investment companies, family business companies, family offices and family private wealth and compares and contrasts how the family investment company has been successfully used in contrasting ways in Europe and the Middle East.

Introduction: family businesses and family wealth

In examining family investment companies and their uses, as good a place as any to commence is with definitions. There are many different terms used in the private client industry to describe corporate platforms for private clients. While they may sound similar, they have different definitions and so clarity is key. A useful starting point is the founder of a business. Such founder is an entrepreneur, professional or otherwise, who has a key idea for which they identify an opportunity. An idea is commercially meaningless without a marketplace for it to be developed and exploited in and so when the founder has the idea but also finds a place for it in the market, that is when the seed of prosperity is planted. Through hard work, investment and enterprise, the business grows. The founder may involve their family in the business and over time the business becomes both mature and successful. We can define this as a family business. It is the core generator of the founder and their family’s wealth and is often located in their home country or the place where the founder has relocated to seek their fortune.

Profitable businesses generate income to their owners in the form of dividends. So, continuing with our aforementioned example of a family business, with the onset of profitability in the business itself, distributions from the family business will accumulate in the hands of the founder and their immediate and wider family as significant family wealth. While that private family wealth has been generated from the family business, when distributed into the hands of the founder and his family, it becomes private family wealth. Prosperity ensues for the family; investment follows at home and internationally for both the family wealth and reinvestment back into the family business also builds the firm’s own capital strength.

However, for both the family and the family business, with prosperity comes worry. The main preoccupations are typically (a) how to preserve the wealth, (b) how to retain control of the wealth, and (c) how to plan for and ensure stable and orderly succession for both wealth and control. Such worries are a push factor towards taking prudent, independent expert advice. Pull factors for taking such advice also include tax-efficiency, good governance and a desire to professionalise operations. This often leads families to seek customised planning and structuring solutions from private client practitioners. This could be for either or both the family business and the family wealth.



There are and always should be overall objectives for both the family business and family wealth together. However, there are also specific objectives for each of those in turn. The aim is always to reconcile the two sets of objectives for a harmonious approach wherever possible.

The family’s overall objectives for both the business and the private wealth portfolios are fundamentally preservation, avoidance of dissipation (or break-up of the portfolio), avoidance of conflict and certainty of succession. Legacy also features.

The family’s specific objectives for their business and portfolios will differ for each of the different parts of their organic structure. The crown jewel is often (or at least, in the beginning) the family business. It is the cash generator which funds the rest of the structure and the requirements of the family. The specific objectives for the family business will be maintaining (and providing for the eventual transfer of) control, introducing governance, long-term strategic management, reinvestment and involvement of family members where that is possible and does not introduce either disincentive for third party employees or risk arising from inexperience or unsuitability of family members.

As aforementioned, whilst the family’s private wealth originated from the family business, in family hands it becomes investable again (when not used to fund costs, lifestyle or charity). The specific objectives for the family wealth will be planning for entitlements, distributions, growth, returns and  tax. Confidentiality is also a key concern - balancing privacy with a need for access to information. Families also want to avoid misuse and waste and they wish to simplify and rationalise management (either through experts or in-house through a family office).


To meet these overall and specific objectives, wealth structuring options include trusts, foundations, companies, funds, charities and constitutions. Each of those plays a different role and they are not necessarily mutually exclusive from each other. In fact, many private clients will have a combination of these for their family businesses and family owners, with a focus on suitable, compliant and sustainable solutions. Recalling the distinction between the family business and the family wealth as well as the overall and specific objectives outlined above, helps to identify which of these options best suits the family’s needs. A one-size-fits-all approach will fail. The solution must be tailored to the overall and specific objectives of this family and their philosophy and values. A note of caution is also prudent: the assets of the family business are not the assets of the family. Those are legally separated through the layers of the structure through which they are held. Contemporary transparency, accounting and governance requirements simply no longer tolerate the tendencies of some family members to “dip their hands in the company till” when they require a cash injection or even use of company facilities, products or services. Clarity on what belongs to whom is essential to avoid blurred lines in this respect.

Trusts and Foundations are typically the umbrella arrangement that hold the family wealth. For the family business – which may be in the legal form of a company- family constitutions are the statements that set out who runs it, how, with what consultation, communication, capability and the involvement, values and expectation of the family members. Family offices are mandated to manage the capital. As we have seen, all of those are separate and distinct from the family business and the family private wealth. So what, then is a family investment company and how does it fit with these other definitions? The answer is that if some or all of the members of the family wish to invest their family wealth collectively as a group, one of the ways they could do this is by using a family investment company, which is a separate company to the family business (but may have the same or similar owners). This is considered in greater detail below.


Family Investment Companies – What Are They?

A family investment company is a legal entity formed and owned by family members for the purposes of investing family private wealth outside of the family business. As we have already defined, the family investment company, the company that holds the family business and the family office company are not the same entity. Each is different. In practice, they can often involve the same personnel and because of their common overall objectives, distinctions become blurred. They are, however, separate and that is why it is so important to bear the aforementioned specific objectives in mind.

In practice, family investment companies are used in a different way in Europe than they are in other territories such as the Middle East. According to private client practitioners, family investment companies have become very popular in Europe in the last five years. They have been used by nuclear European families in high tax environments as succession planning tools aimed at mitigating inheritance tax and other taxes and for transferring capital between generations of a family.

Their benefits include asset planning and an emphasis on long-term capital growth, whilst mitigating tax. This may also be why in some professionals’ and clients’ minds, there is a debate to be had about whether a family investment company can be used as an alternative to a trust.

In the Middle East, family investment company are in vogue too, but for different reasons. They are mostly used as private pooled investment vehicles. Members of extended families trust each other and identify the benefits of collaborating for scale and efficiency when co-investing. They also want identifiable interests of their own within the pooled capital and they wish to benefit from co-ordination, management efficiency and lower cost by coming together with their money and their investment appetite (as opposed to going it alone). For such Middle Eastern families, their primary objective is to generate income from family wealth through entrepreneurship, in a diversification away from reliance on the family business.

As you can see, the European model of a family investment company is geared towards transferring capital between generations whilst retaining control in an older generation and mitigating tax for a younger generation. The Middle Eastern model of a family investment company reflects a drive towards diversification and the dynamics of close but large-sized extended families on a more equal footing with each other despite their being from different generations or branches of a family. Each model is explored in greater detail in turn below.


European Family Investment Companies - Transferring Capital Between Generations

When you hold assets in your own name, you retain ownership, control, liability and title to those assets alone. You are fully responsible for them. Using a company to hold your assets allows you to separate ownership from control and limit liability away from the rest of your assets. European family investment companies take advantage of this principle by deliberately using two distinct categories of shareholders in a company: controllers and owners. This enables a family to retain control of the company with the elder generation, whilst placing ownership with the younger generation.

In a simplified example of a typical European nuclear family structure, the parents establish a family investment company in the form of a private company limited by shares. The articles of association are tailored to provide for the company to have two different share classes, being “A” shares and “B” shares. The “A” shares entail the right to appoint a director and vote (but do not come with an  entitlement to dividends or return of capital). The parents hold the “A” shares and thus form the ‘controller’ element of the mini-structure. The “B” shares have no voting or control rights, but do have  full entitlement to dividends and return of capital. The children hold the “B” shares and so become the ‘silent owner’. A note of caution regarding children: under English law, children reach the age of capacity at eighteen but there is no statutory restriction on minors holding shares in companies. That said, there may be a need to verify that the company’s articles of association prohibit this.

The articles of association of the family investment company entrench the position of the directors as the controlling mind of the company. Control is retained through board voting and signature rights on accounts. A third director may also help avoid deadlock where that may arise between the two parents, for example. A shareholders agreement sits alongside the articles and sets out terms governing issue and transfer of shares and reserved matters. The emphasis is on these terms ensuring the family retains ownership before outsiders, using first rights of refusal and pre-emption rights.


The parents fund the family investment company by way of interest-free loan. This corporate finance and the balance sheet equity, allow the family investment company to acquire assets in its own name. This separates the assets as being owned by the company, not the family members personally. Income from profitable investments can either be prudently re-invested or extracted fairly efficiently in the form of loan repayments or dividends from the company to the shareholders who are entitled to such income under the articles. In practice, nuclear families who have succession planning objectives as their principal driver are more likely to reinvest or retain profits within the company for the long-term. Over time, the underlying capital value of the family investment company grows to the children’s benefit, but the parents retain operational control (albeit not beneficial interest in the capital) during their lifetime.

Through this arrangement, in practice, capital is moving from the older to the younger generation through a bespoke legal structure based around a family investment company. If the children do need to access capital when they are older, redeemable shares can be provided for within the articles, so there is some element of flexibility.

Of course it is also the case that family trees change over time and in-keeping with succession planning objectives, the elder generation may wish to make some provision for future or as yet unborn issue. This can be achieved in the context of a family investment company by using a trust arrangement to hold some of the equity in the family investment company itself. Such an ownership arrangement (to be used alongside the direct ownership of the parents and children, if desired) can help regularise the balance of influence in the equity. The presence of the trust, if appropriately allocated in the equity, can help ensure all family members stay in minority shareholder positions, so that no single family member dominates the equity. The beneficiaries of the trust could be, for example, unborn issue – thereby protecting their future entitlements in the family investment company. When the parents have died, the appointment of directors can still be controlled, using a letter of wishes that guides the trustees of such a trust. These are all good examples of how trusts and family investment companies can be productively and efficiently used alongside each other as opposed to instead of each other.

As is evident, hallmarks of the typical European family investment company for a nuclear family therefore include the facilitation of asset succession and decreased reliance on probate (with mitigated inheritance taxes). Whilst cash extraction is unlikely to be a driver for such a discrete succession structure, if extracting cash through dividends (rather than re-investing) do note that, there may be income tax consequences when the distribution is in the hands of the shareholder, notwithstanding the payment of corporation tax (if any) at the level of the company itself already. To avoid such a potential ‘double hit’ it is therefore essential to take independent tax advice and consider substance requirements before deciding on the relevant jurisdiction to form and manage the family investment company in.

Aside from the legal and tax implications, it is also worth considering the moral impact of the European family investment company structure. Such a model inherently entails the deliberate segregation of two totally distinct tiers of citizens within one nuclear family. The rationale for the duality lies in tax planning; but the net effect may include a missed opportunity to educate, incentivise and involve the younger generation in the practical experience of how to manage and control an investment company. Such skills are typically best learnt by newcomers in practice through apprenticing and observing the deliberations and considerations of directors over time. If the younger generation is totally excluded from the board in a European model family investment company, this learning and development advantage may be lost or diminished in the process. Some may point out that it is possible for the younger generation to attend board meetings as observers: however great care needs to be taken to avoid them inadvertently becoming shadow directors or otherwise actively participating without the proper appointment.  


Middle Eastern Family Investment Companies – Co-Investment Platforms

In Middle Eastern families, the push factors towards a family investment company are less driven by tax or succession and more so by a collective desire by relatives to mutually benefit through the scale and efficiency of collaborative co-investing. This is likely a direct reflection of (a) Middle Eastern jurisdictions typically being lower tax environments than their European equivalents and (b) the social make-up of Middle Eastern communities and society (which is more orientated around the extended family group and much larger cross-generational households). Elder’s, including men, women and younger members of the same family may have decided to mitigate the effect of forced heirship rules under Islamic law and local geopolitics, whilst embracing diversification away from the family business by collectively investing through a private vehicle owned by family members.

Other key concerns for the family members include the effects of divorce, sibling rivalry, family disputes, US persons within the family and a strong desire for confidentiality. The ownership and control of discrete equity interests which are identifiable and independently accounted for, appeals to appease such family concerns. In extended family units there is often one member of the family who is considered business-minded, entrepreneurial and who has an appetite and suitability to represent other more passive members in co-ordinating investment of their capital without assuming any beneficial interest in the same. Such person may be remunerated through management fees and may base themselves, for example, from a family office when managing the portfolio of a family investment company. In the past it may have been a family elder or figurehead (typically a male person from within the family). However, today, in practice, with the rise in education and experience of younger generations in the Middle East, that is often a younger person and not infrequently a woman. They are chosen because of their capability and spirt and not merely on the basis of prestige or position. Their education is often from the highest calibre of global institutions and yet because of their heritage and close ties to family, their intrinsic understanding of the social, cultural and ethical preferences of the family group is uncompromised.

There are legal tools which can be used to meet the family’s objectives within the Middle Eastern model family investment company. These include preventing share transfer without pre-emption, valuation discounts as disincentive to leave the co-investment group (thereby keeping the family and its investments co-aligned and together), ethical parameters for investment (including Shariah complaint, if desired) and pursuing income generation to fund cash and lifestyle needs, as well as capital growth for the medium and long term.

There are many different legal forms that the family investment company can take and jurisdictionally the family investment company may be located onshore, offshore or in a free zone, depending upon tax and substance requirements:

  • The most common form of organisation for a Middle Eastern family investment company is a private company limited by shares. These offer the advantages of limited liability, separate legal personality and ease of administration (not dissimilar to their European counterparts).

  • There are also unlimited companies, which in some jurisdictions, have greater confidentiality due to fewer filing and accounting requirements – but they may not be suitable for all classes of investments (i.e. those entailing liability).

  • Partnerships are the simplest form of business but entail no separate legal personality and unlimited personal liability. Their use would be rarer in this context.

  • Limited liability partnerships have separate legal personality but partners are taxed at the member level. If at all, these would be used only by much larger family groups who sought a more corporate institutional structure.

  • Limited partnerships have no separate personality but act by a general partner who has unlimited liability, whereas the limited partners invest capital but are passive in management. For those families seeking an almost “private fund” type set-up, this could be a useful model, especially where third parties are also being introduced to co-invest alongside the family. There are also some new types of limited partnerships in some jurisdictions, where limited partners need not contribute capital, but do not benefit from separate legal personality.

The optimal legal form of the Middle Eastern family investment company will depend on the nature of the investments held, the liability attached to them (if any) and the tax profile of the family. Important considerations include whether there is to be any security granted in consideration of lending or corporate finance, auditing, external managers, whether everyone will contribute capital and what the expectation of the family is for getting income and capital out of the structure.

Practical considerations are also important to the family investment company structure. The appetite for decision-making amongst all of the family investors may be low. For those who do wish to participate, a frequent frustration of the manager is the receipt of diverging views from family elders (or their representatives) or from disruptors within the family who think they know better. Clear documentation setting out sound corporate governance can help with this. That  may be enshrined in the articles of association or contracted in a shareholder’s or partnership agreement. More detailed or personal terms may also be included in a family charter or constitution, which addresses some of these corporate governance issues alongside other family values.

In practice, some family members may wish to retain the flexibility to skip an investment round or draw income from the family investment company when needed. If that is a practical likelihood, it should be anticipated and provided for in the documentation from the outset. This will avoid tensions and bias or prejudice to particular family members at a later stage. The driver towards using a corporate vehicle in the first place is to shield the family from the idiosyncrasies of co-ordinated personal investments and to independently ‘platform’ the co-investment through a registered structure. But this does not prevent tailoring it to provide for the practical realities of this family and its dynamics in a neutral way from the outset. Non-executive appointments to the company board (or through an advisory committee) can also help mitigate the effect of family politics filtering into the investment company itself.

Unlike family businesses, family investment companies in the Middle East tend to be flatter, more equal structures than the traditional patriarchal hierarchy. This incentivises and provides a more educative and collaborative approach to wider family members. There is a path open to younger persons to join the board of the company, participate in decision-making and pursue their own professional development within a live corporate. In theory, an exit could include a trade sale, listing or private equity institution investing. Joint ventures between different family groups across the region and the world, are also possible and common.

Finally, forced heirship rules might be mitigated through the allocation of equity in the family investment company during the lifetime of family members. This is of particular concern in the Middle East more than many other jurisdictions.


Advantages Of Family Investment Companies In General

Aside from the specified advantages of the jurisdictionally specific types of family investment company in Europe and the Middle East set out above, there are also some overall and generic advantages common to the structure regardless of jurisdictional use. For example:

  • Perpetual succession is a key advantage. The family investment company will continue to exist despite the death, bankruptcy, insanity or change of composition in family members.

  • The life of the company does not depend on the life of the owners (but instead on its own financial health).

  • Families are already used to operating the family business in the form of a corporation with shareholders, a board of directors, executives and resolutions. They therefore have an inherent familiarity with investment company structures, which are often in the same form.

  • Family members like the fact that they have identifiable certified shares which they can pass on as part of their estate and have representation for during their lifetime (through board appointments or shareholder meetings).

  • Company law is perceived by families as more certain, clearly expressed and conceptually easier to understand than, for example, concepts of trusts and foundations, whose origins are inherently discretionary and routed in the history of common law and equity.

  • Liability can be easily directly limited in a family investment company. Clearly there are advantages to this in the Middle East, when you consider the traditional favourite asset classes such as real estate and funds.

  • Tax rates generally tend to be lower for companies than for individuals and so coupled with the binding cohesiveness for relatives to be co-invested together, it is often beneficial for families to invest through a family investment company rather than in their own capacity.


Points to Note

In the past, families traditionally took greater control of their offshore companies by being directing minds themselves – but with the rise of substance legislation, we may now see less of that or instead an on-shoring of structures where families do not want to cede control. Either way, it is clear that to avoid risk and be properly compliant with regulations, central management and control of a family investment company must be taken seriously and convened in the appropriate jurisdiction that substance demands (and not according to the lifestyle or whims of the family’s global travel schedule).

There may still be a need for a Will and or a trust or some estate planning to plan for the ownership of the equity held in the family investment company and some form of governance documentation for succession to roles within it. Essentially the point to note is that forming a family investment company is not the end of all planning needs for private clients.

Families frequently make the mistake of “running before they can walk”, creating complex share classes and detailed aspects to the legal structure of their family investment company, which they may not actually need. This results in them delaying the implementation time, confusing shareholders and incurring cost that they may not need to.

Families also assume they can demand income from the vehicle when they want it or need it: this will not always be possible, since distributions must be made in accordance with applicable company law and accounting requirements. Interest-free repayable-on-demand loans can be a tax efficient way of funding and extracting funds out of family investment company at better tax rates, but caution must be taken to be mindful of debt to equity ratios and capital adequacy.

Without strong support from a fiduciary who fits with the profile of the family, there may not be competent in-house administration, reporting, bookkeeping, filings and compliance for the family investment company. In fact, families who anticipate that they can do all of this themselves, end up incurring greater cost in the long run, when they have to retroactively document deliberations or trace issues through poor records.



Family investment companies can be very useful tools for co-aligning the interests of family members seeking to invest their private wealth away from a family business. The fact that family investment companies have developed quite differently in Europe and the Middle East is a direct reflection of the legal, tax and societal environments of those respective jurisdictions. Whilst family investment companies may not be the universal solution to all private client planning needs, when used alongside trusts, sound bespoke corporate and family governance instruments and relevant constitutions, they can be highly effective vehicles for fulfilling family member’s objectives.


Global Law and Business - March 2020

Mustafa Hussain
Private Office Legal Counsel | Board Member
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